Executive summary

The economy is recovering

Italy is recovering after a deep and long recession. Structural reforms, accommodative monetary and fiscal conditions, and low commodity prices have helped the economy to turn the corner. The Jobs Act, part of a wide and ambitious structural reform programme, and social security contribution exemptions have improved the labour market and raised employment. Yet, the recovery remains weak and productivity continues to decline. Returning the banking system to health will be crucial to revive growth and private investment. More investment in infrastructure will be essential to raise productivity.

Despite ambitious reforms, doing business remains complicated, thus hindering productivity

The government has made significant progress on tackling structural impediments to growth and productivity. Yet public-administration inefficiencies, slow judicial processes, poorly designed regulation and weak competition still make it difficult to do business in Italy. Labour and capital resources are trapped in low-productivity firms, which hold down wages and well-being. Innovative start-ups and SMEs continue to suffer from difficult access to bank and equity finance, curbing incomes for many.

Reforming education and active labour market policies will improve inclusiveness

Literacy scores are low and job-skill mismatch is one of the highest among OECD countries, depressing earnings and well-being. Many workers are under-skilled in the jobs they hold, highlighting mismatches between workers’ skills and those required by employers. Improving the education system and labour market policies are crucial to raising real wages, job satisfaction and living standards. The Jobs Act and the Good School reform go in the right direction and need to be fully implemented.

MAIN CHALLENGES	KEY RECOMMENDATIONS
Macroeconomic and financial policies to sustain inclusive growth
The planned fiscal stance is appropriate. Weak economic growth, low inflation and high tax evasion are contributing to the slow reduction in the budget deficit and high public debt. Public spending restraint has partly relied on infrastructure-spending cuts.	Continue on the path of prudent fiscal policies and prioritise spending on effective infrastructure and innovation programmes. Increase tax revenue by enhancing tax compliance (by investing more in IT systems and human resources, extending the use of e-invoicing and lowering the threshold for cash payments); and introducing real estate taxes based on updated cadastral values. Use additional tax revenues to gradually reduce social security contributions on permanent contracts.
The Italian banking system features low profits and high non-performing loans. These weaknesses may discourage lending and investment. Policy has started to address these issues.	Continue to develop the secondary market for NPLs. As envisaged by the European Supervisory Mechanism, set gradual and bank-specific targets to reduce non-performing loans, backed up by sanctions such as additional provisions, asset sales, suspension of dividend payments and restructuring banks operations. If public funds are needed to recapitalise distressed banks, take full advantage of EU regulations, imposing losses on equity and bondholders, and restructuring banks’ operations. Compensate retail bondholders for the losses they will incur.
Small and poorly targeted cash transfers fail to reduce poverty rates among the young and children.	Fully legislate and implement the planned nationwide anti-poverty programme, target it towards the young and children and ensure it is sufficiently funded.
Improving business conditions
Low public administration efficiency hurts private sector productivity and social welfare.	Continue efforts to enhance the efficiency and transparency of the public administration by: making further progress on e-services; fully implementing the broad public administration reform; amending the parts of public-administration reform blocked by the Constitutional Court and swiftly implementing them.
Insolvency procedures are slow, costly and uncertain.	Use debt-equity swaps more frequently by forcing creditors to share the burden of firm restructuring.
Regulatory bottlenecks curb competition in key professional services holding back performance and reducing incentives to invest.	Approve the competition law under discussion by Parliament.
Innovation and knowledge based capital are low, especially among small and medium enterprises. The venture capital industry is small. The Government has recently introduced a wide array of measures addressing these problems.	Evaluate the effectiveness of recently introduced research and development tax credits and other fiscal incentives in terms of innovation outcomes and forgone tax receipts. Foster the development of the venture capital industry by leveraging private funds and expertise.
Enhancing skills and matching skills with labour market needs
The unemployment rate is decreasing but remains high, especially among the young and long term unemployed.	Employ more specialised counsellors and profiling tools in the public employment services. Assess the labour market impact of job-search and training programmes and focus funding on those that are performing well.
Workers skills are deficient. The early school leaving rate is decreasing yet remains high.	Build partnerships between schools and businesses to create high quality work-based learning for students as envisaged by the Good School reform.
The share of workers with tertiary education is low. Apprenticeships are underused and the share of students with working experience is low. Post-secondary vocational education and training (VET) is weak.	Scale up post-secondary VET with strong involvement of the business sector, based on the example of Istituti Tecnici Superiori. Establish a national body on VET involving the business sector and all key stakeholders to link the training component of VET with apprenticeships; ensure high-quality workplace training and identify skills needed in the labour market.